5/06/2010 @ 5:40PM

How Federal Crackdown on Bribery Hurts Business And Enriches Insiders

In 2007 Weatherford International, an oil service firm with roots in Houston, discovered it might have a bribery problem on its hands–one or more of its employees might have paid bribes in Europe. Weatherford, following legal custom, notified the Justice Department office responsible for enforcing an anti-bribery law, whose assistant chief was William (Billy) Jacobson. It also hired a law firm, Fulbright & Jaworski, to conduct an investigation, which found more potential bribery in West Africa. Weatherford promptly reported that to the feds, too. By that time Jacobson had left Justice to join Fulbright as a partner and started doing compliance work for none other than Weatherford. Then, in 2009, Jacobson left Fulbright to become a general counsel at Weatherford, a job that in 2008 carried compensation of $4 million.

For Fulbright the investigation was quite profitable, and it’s still going on. In just over two years Weatherford paid Fulbright and other firms $106 million for the bribery probe and other investigations. (Weatherford says Jacobson has been “walled off” from the bribery investigation and that he makes less than $4 million.)

Nice work if you can get it–and to the tune of billions of dollars, lawyers, accountants and consultants, many with past ties to the Justice Department, are getting it. In the last few years, as the feds cranked up enforcement of the 33-year-old Foreign Corrupt Practices Act, a thriving and lucrative anti-bribery complex has emerged. Whether it’s having any impact on reducing bribery is another matter. Instead, companies can find themselves getting extorted in foreign lands, only to get extorted again by Washington. It works generally like this: A company that suspects bribery overseas hires a battery of lawyers, accountants and investigators who may then report any findings to Justice in hopes of some undefined leniency. More likely, the company pays out huge fines and then hires more lawyers as government-mandated compliance monitors, a job that can stretch into years of legal billing.

“This is good business for law firms,” says Joseph Covington, who headed the Justice Department’s FCPA efforts in the 1980s and is now codirector of white-collar defense at Jenner & Block. “This is good business for accounting firms, it’s good business for consulting firms, the media–and Justice Department lawyers who create the marketplace and then get yourself a job.”

Mark Mendelsohn, 42, headed the Justice Department’s FCPA unit when the surge in enforcement largely occurred. In April Mendelsohn left Justice and started building an FCPA practice at a big law firm, Paul Weiss, reportedly with an annual salary of $2.5 million. “At some point a new person will sit in my seat,” said Mendelsohn while on stage with a group of FCPA defense lawyers at a conference in February. “I will join Peter and Richard and Mary on the other end of the dais.” Mendelsohn declines to comment on his new job other than to note that it is routine for lawyers who leave the Justice Department to do white-collar defense work for corporations.

For decades the FCPA, which prohibits bribery of foreign government officials, was a sleepy statute, hardly enforced. That all started to change with the collapse of Enron in 2001 and the passage in 2002 of the Sarbanes-Oxley Act, which requires internal procedures at publicly traded companies to pump out disclosures of material events–like potential acts of foreign bribery. In 2000 federal prosecutors brought no FCPA criminal cases. In 2004 there were 3. Last year there were 34 criminal FCPA actions. A lot more are in the pipeline. The Justice Department has 150 open FCPA investigations.

What are these prosecutors accomplishing? Maybe they are fighting for truth and justice. Maybe, that is, it makes sense for the U.S. to hold its corporations to a higher standard of integrity than the French or Chinese outfits they compete against when trying to win business abroad. The prosecutors, though, are doing something else at the same time. They are creating a lucrative industry–FCPA defense work–in which they will someday be prime candidates for the cushy assignments.

A former prosecutor, to be sure, does not work on the defense of the same case he had as a government lawyer. But there is nothing to stop prosecutors from ginning up cases that will feed the lawyers who used to have their jobs or from looking forward to a payday in the private sector that will be made possible by their busy successors at Justice.

Many of the 150 pending cases will probably end with so-called deferred prosecution agreements. These involve the government threatening to bring an indictment against a company–which could effectively put the firm out of business–unless it agrees to adhere to certain practices. This hammer gives the feds immense power–for one thing, they don’t have to prove their legal theories of bribery in court.

“The scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it’s unclear if they would prevail in court,” says Lucinda Low, who has helped companies deal with the FCPA for years. “You don’t have the checks and balances you would normally have if you had more litigation.”

The granddaddy of cases is the one involving
Siemens
, Europe’s biggest engineering firm. In December 2006 Bruce Yannett, a partner at law firm Debevoise & Plimpton, was hired by Siemens to conduct an internal investigation as evidence was emerging about bribes. The Munich public prosecutor had just pulled off a series of dawn raids at Siemens’ offices and Justice was getting involved (foreign companies with U.S. ties have fallen under FCPA jurisdiction). Yannett got help from accounting firm Deloitte & Touche and went to work for two years.

Debevoise and Deloitte charged $850 million in fees and expenses. Debevoise deployed 100 lawyers and 110 support staff who billed 582,000 hours while Deloitte put 1,300 staff members on the job, who worked 949,000 hours searching 40 million bank documents and reviewing 127 million accounting records. The investigators spent an additional $5.2 million for translation services and $100 million more on information technology, bringing Siemens’ cost to nearly $1 billion, not counting fines.

Siemens is no innocent. Over a decadelong period it paid $1.4 billion in bribes to land government contracts on four continents. In 2008 the company pleaded guilty, paying the U.S. government $800 million and various German authorities another $800 million to settle the case.

Winners in this sorry affair: lawyers. “We took our direction from the audit committee of Siemens,” says Yannett, 52, a former federal prosecutor who served as an associate independent counsel in the Iran-Contra investigation. “Our instruction was to get to the bottom of this quickly and cooperate so the company could survive.” Yannett’s work for Siemens helped fuel Debevoise’s 2008 profit per partner of $2.2 million, the twelfth-highest in the nation, according to American Lawyer.

Lawyers and accountants also made a fortune off a recently resolved Daimler bribery case. It had kicked off in 2004 as a Securities & Exchange Commission case when a former employee filed a Sarbanes-Oxley whistle-blower action alleging bribery. It expanded when Daimler hired D.C. power broker and former federal prosecutor Robert Bennett to head an internal investigation. This project involved 85 lawyers from Skadden Arps who looked at transactions from 75 countries. In order to land government contracts for Daimler vehicles, Daimler fed commissions to foreign officials in 22 countries.

The five-year internal investigation cost at least $500 million, our sources tell us. The investigators uncovered and reported to the feds the conduct that resulted in guilty pleas from two Daimler units in April. Daimler agreed to pay $185 million in penalties. Deloitte, which has an FCPA practice headed by Edward Rial, a former federal prosecutor, got its time at the feeding trough. Deloitte declines to comment. Bennett says his work was in the best interest of a company facing serious prosecution.

The FCPA provides moneymaking opportunities even after a case is resolved. Following settlements the Justice Department often requires companies to hire a compliance monitor, whose job is to review a company’s continuing anti-bribery efforts. It seems that an important qualification for these gigs is having previously worked at the Justice Department–as 7 of the 13 FCPA monitors have done. When it came time for Daimler to pick a government-mandated compliance monitor for three years, the company hired former fbi director Louis Freeh.

As its monitor Siemens hired Theodor WAIGel, a former German finance minister, at a projected cost of $52 million over potentially four years. Since WAIGel didn’t know anything about the FCPA the Justice Department insisted he get some U.S. help, so Siemens hired Joseph Warin, a partner at Gibson Dunn who used to be a federal prosecutor. Warin previously had an FCPA monitorship stint at
Statoil
. “It’s an outrage that people get $50 million to be a monitor,” federal judge Ellen Segal Huvelle said in March when chemicals firm
Innospec
pleaded guilty to FCPA violations in her Washington, D.C. courtroom. “It’s a boondoggle.”

The frightened defendants don’t put up a fight–they often tell the government about potential bribery and hope the feds make good on their offer of leniency in return. But companies often feel the results are not what they bargained for. “The benefits of reporting are not very obvious,” says Mary Spearing, an FCPA defense lawyer, who says executives are now questioning voluntary disclosure in instances when Sarbanes-Oxley isn’t forcing it. “You are embarking on an expensive relationship, and you wonder how much worse it would be if they didn’t self-report or cooperated [only] if they got caught.”

Executives trying to figure out what to expect are often told about
Baker Hughes
, the Houston oil service firm that self-reported bribe payments in Kazakhstan that helped it secure some $20 million in profits. It hired Kellogg Huber, a D.C. firm, to conduct a $50 million investigation and reported everything to the feds but still got whacked. A unit pleaded guilty, and a 2007 Justice Department press release trumpeted that “the $44 million in combined fines and penalties is the largest monetary sanction ever imposed in an FCPA case.”

Not all government claims stand up to scrutiny. The government spent five years on the FCPA prosecution of Frederic Bourke Jr., cofounder of bagmaker Dooney & Bourke, saying he should go to jail for ten years for investing with Viktor Kozeny, a Czech entrepreneur who allegedly paid bribes to get in on the abandoned privatization of the Azeri national oil company. Bourke, who said he knew nothing about any bribes, was convicted by a jury, but in November U.S. Judge Shira Scheindlin in Manhattan sentenced him to only a year and a day, saying “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook.” In a rare admission of error, three years into the case the government itself dismissed bribery charges it brought against David Pinkerton, a former AIG managing director who had been indicted alongside Bourke.

Things get really stretched when the SEC swoops in and exercises civil enforcement authority under the FCPA–as it is doing with a new bribery division. Consider the case of the
Natco Group
, a Houston oil service firm that got in trouble trying to keep its workers out of Kazakhstan jail. The company won a contract in 2005 to provide instrumentation and electrical services in Kazakhstan. The company hired expat workers and obtained immigration documents for them, but Kazakh authorities suddenly claimed the expats lacked proper papers and threatened to jail or deport them if they did not pay cash fines. Natco then authorized the expats to use personal funds to pay the prosecutors $45,000. The workers also paid $80,000 to an unlicensed immigrant consultant who had close ties to a Kazakh official. Natco later reimbursed the workers, booking the payments as bonuses and fines–an accounting that was uncovered in a routine audit in 2007.

Natco reported the issue to the government and paid outside lawyers and accountants $11 million to investigate, causing Natco cash-flow problems. In January it still got slapped with a $65,000 civil penalty for falsely recording the payments on its books.

Employees of Utah herbal-supplement seller Nature’s Sunshine paid bribes to Brazilian custom officials to get the product into the country. When Chief Executive Douglas Faggioli found out about the bribes he told the SEC–only to get hit with a civil action for not adequately supervising his staff. He and his ex-chief financial officer last year each paid $25,000 as part of an SEC settlement of the case.

Mark Mendelsohn, who ran the FCPA unit at Justice from 2004 to 2010, defends the government’s anti-bribery work. He says corruption has a corrosive effect on the rule of law around the world, undermining economic development and potentially harming U.S. interests. “There are business benefits from operating in a compliant and ethical fashion,” says Mendelsohn. “The work we are doing in this area is changing the way business is done.”

What about the possibility that U.S. firms are losing business to competitors who don’t have to be so honest? Mendelsohn insists the government has devoted significant resources to try to make the world playing field level for U.S. business. He points to the 1997 convention that got 38 of the world’s biggest exporters to agree to make foreign bribery illegal. Still, only the U.S., Germany, Norway and Switzerland have active enforcement of anti-bribery statutes, according to Transparency International, the global corruption-fighting group. Since then, moreover, the landscape has changed: China, India and Russia are home to big global players and don’t prosecute those corporations for paying bribes abroad–although they do seem keen on investigating U.S. companies like
Hewlett-Packard
for bribery in their own countries. “Until there is equally vigorous prosecution elsewhere, U.S. companies may be disadvantaged,” concedes Nancy Boswell, president of Transparency International USA. “But, for now, U.S. prosecution of U.S. and foreign companies is a necessary step.”

Andrew Spalding, a former securities lawyer on a Fulbright grant studying the impact of the FCPA in India, believes enhanced FCPA enforcement will cause U.S. companies to reduce investments in places where corruption is common or make them uncompetitive there. He points to published studies on economic sanctions showing that when the U.S. tries to change behavior through threats of economic withdrawal, the effort often fails because other countries–black knights–swoop in to fill the void. “We are not thinking honestly about the role Russia, China and India play in international business,” he says.

Oil service firm
Ensco International
, which moved its headquarters last year from Dallas to London, abandoned Nigeria after getting caught in an FCPA dragnet over what might have been payments made to customs officials to get import permits for drilling rigs, according to its SEC filings.

In Kazakhstan Western oil firms, once dominant in the Central Asian country, seem to be losing influence to the Chinese. One reason is that American James Giffen, once the oil advisor to President Nursultan Nazarbayev, was indicted in 2003 by the Justice Department and accused of funneling $80 million in payments from U.S. oil firms like Mobil Oil to bank accounts of Nazarbayev and others. The case has been stalled (Giffen pleaded not guilty), and in the meantime Chinese oil firms have been ascendant in a country long suspicious of Chinese intentions. A Nazarbayev political opponent recently alleged that a Chinese oil firm bribed its way into key Kazakh oil assets.

Still, nobody in Washington is rethinking enhanced FCPA enforcement. There is no movement for different approaches, such as a corporate amnesty program or less severe punishment. “A lot can be remedied by more prosecutorial discretion and some common sense,” says Daniel Nardello, a former federal prosecutor and founder of Nardello & Co., which has a big FCPA investigations business.

On the contrary, financial reform bills being circulated contain provisions that would give whistle-blowers as much as a 30% bounty on FCPA fines. The Justice Department is now targeting pharmaceutical and medical device companies, which do a lot of exporting from the U.S. and are easy pickings because their clients are government-run health systems. Companies like
Medtronic
,
Stryker Corp.
and
Zimmer Holdings
are dealing with FCPA investigations. Even cosmetics seller
Avon Products
is in trouble and expects to pay lawyers and accountants $95 million this year to investigate itself for bribery in China and elsewhere.

All those damn-fool engineers and doctors trying to make people healthier. They should have gone to law school.